Compliance Challenges in 2024 for RIAs
In 2024, the regulatory landscape for Registered Investment Advisory (RIA) firms continues to evolve. With enhanced scrutiny from regulators and shifting market conditions, compliance is becoming increasingly complex. Staying ahead of key challenges is essential for RIAs to maintain regulatory compliance and protect their clients' interests. Below, we outline some of the most significant compliance challenges RIAs will face this year, along with tips on how to navigate them effectively.
1. Increased Scrutiny of ESG Investment Strategies
As environmental, social, and governance (ESG) investing gains prominence, regulatory bodies like the Securities and Exchange Commission (SEC) are intensifying their focus on how firms incorporate ESG factors into their investment decisions. The SEC's concern lies in "greenwashing" or the potential for firms to overstate their commitment to ESG principles.
Key Compliance Focus:
RIAs must ensure that ESG claims are substantiated with clear documentation, consistent client disclosures, and alignment between marketing and actual investment strategies.
Implement a rigorous process for verifying and documenting ESG-related metrics.
2. Cybersecurity and Data Privacy
Cybersecurity remains a top priority for regulators, especially with the increase in remote work and digital financial services. RIA firms hold sensitive client information, making them prime targets for cyberattacks. In 2024, new regulations, like the proposed SEC Cybersecurity Rule, could introduce additional requirements for RIAs around breach reporting, incident response, and cybersecurity governance.
Key Compliance Focus:
Enhance cybersecurity protocols, including encryption, multi-factor authentication, and real-time monitoring.
Ensure data protection policies are comprehensive and align with new privacy regulations, such as the California Privacy Rights Act (CPRA).
Develop a robust incident response plan and conduct regular cybersecurity audits.
3. Focus on Fiduciary Duty and Best Interest Standards
The SEC continues to emphasize fiduciary responsibility and expects RIAs to act in the best interests of their clients. The implementation of Regulation Best Interest (Reg BI) and the Investment Advisers Act of 1940 impose strict obligations regarding conflicts of interest, fees, and transparency.
Key Compliance Focus:
Ensure disclosures are clear and thorough, especially regarding fees, conflicts of interest, and third-party arrangements.
Continuously review and update Form ADV to reflect current business practices and any material changes.
Conduct regular compliance reviews to ensure adherence to fiduciary duty and best interest standards.
4. Evolving Marketing and Advertising Rules
The SEC’s updated marketing rule, which became fully effective in 2023, continues to present challenges for RIAs. The rule permits the use of testimonials, endorsements, and performance advertising under certain conditions but requires strict adherence to disclosure requirements and compliance safeguards.
Key Compliance Focus:
Implement processes to review and approve all marketing materials, including performance advertising and testimonials.
Establish a framework to ensure proper disclosures are made, especially concerning hypothetical or back-tested performance.
Maintain detailed records of all advertising practices, including the rationale behind performance presentations and client testimonials.
5. Heightened Focus on Fees and Expenses
RIAs are facing increasing scrutiny regarding how fees and expenses are charged to clients. Regulators are examining discrepancies between fee disclosures and actual billing practices, particularly concerning advisory fees, custodial fees, and third-party charges.
Key Compliance Focus:
Review fee schedules and client billing statements to ensure they are consistent with client agreements and disclosures.
Establish a process for reviewing third-party fees and ensure they are accurately reflected in client disclosures.
Conduct regular audits to identify and address discrepancies in fee billing practices.
6. Expanded Regulation on Outsourcing and Vendor Management
The SEC's proposed rule on outsourcing by RIAs would impose new oversight responsibilities on firms that outsource critical functions to third parties. RIAs will need to ensure that any vendor relationships, particularly those related to compliance and cybersecurity, are properly managed and documented.
Key Compliance Focus:
Develop a comprehensive vendor management policy that includes due diligence, ongoing monitoring, and termination procedures for outsourced services.
Implement a risk assessment framework for evaluating third-party service providers, focusing on cybersecurity, compliance, and operational risk.
Maintain records of vendor contracts, risk assessments, and performance evaluations.
Conclusion
The compliance challenges in 2024 for RIAs will be more complex than ever. By proactively addressing the key challenges outlined above, RIAs can strengthen their compliance programs, reduce regulatory risk, and build trust with clients. We encourage you to reach out to your compliance consultant or legal advisor to ensure your firm is well-prepared for the road ahead.
